Dividend Stock Investing with The Dividend Guy
FEATURING: THE DIVIDEND GUY
In 2017, I bought $MSFT @ $75.
Yesterday, $MSFT announced a 10% dividend increase. 💪
I trust my dividend triangle to find great companies:
🔼5 year Rev growth
🔼5 year EPS growth
🔼5 year Div growth
— TheDividendGuy (@TheDividendGuy) September 16, 2020
Q: Tell us about your Dividend Stocks Rock service, and how you aim to educate investors about dividend stock investing on your blog, The Dividend Guy.
A: I’ve always been passionate about investing. After a successful career in the financial industry, I resigned from my position as a private banker in 2016 to spend all my time on Dividend Stocks Rock (DSR). This unique dividend investing program now helps over 1,500 investors to invest with conviction and enjoy their retirement. DSR is a complete platform with portfolio models, stock analysis, private webinars (by yours truly) and a weekly newsletter.
The significant difference with other investing services is the personal approach and the passion we bring to our venture. We also have a more unique approach than many other dividend investors in terms of stock selection process.
Q: For those who are new to dividend investing, what are some of the advantages and disadvantages of the strategy compared to other approaches, such as growth investing?
A: Dividend growth investing is all about finding companies showing a balance between growth (stock price appreciation) and income (dividend payments). Instead of going for the yield, I focus on the dividend growth year after year.
Dividend growers tend to outperform the market over the long haul (Vanguard, Ned Davis Research). They also do it with less volatility. In other words, dividend growth investing leads to more money with less stress.
Unfortunately, this also means you must ignore all non-dividend paying stocks. There is no chance a company like Facebook (FB) or Tesla (TSLA) appears on my radar. It’s a sacrifice I’m willing to make if it means consistent growth for my portfolio.
Read More: How to Find and Compare Dividend ETFs
Q: The chart you shared above introduces the “dividend triangle.” Can you break down that philosophy and what you look for in dividend stocks?
A: This is my starting point for any stock research. I am looking at three specific metrics:
Revenues: A business is not a business without revenues. What is the difference between a company growing their revenues versus a company showing stagnating results? We are looking for businesses with several growth vectors that will ensure consistent revenue increases year after year.
Earnings: A company cannot pay dividends if it doesn’t earn money. This is a very simple statement, but if earnings don’t grow strongly, there is no point in assuming that the dividend payment will increase. Keep in mind that earnings per share (EPS) is based on a GAAP calculation. Accounting principles are not necessarily aligned with cash flow. This means you are better off looking at the EPS trend over 3, 5, and 10 years, and using an adjusted EPS (which accounts for one-time events revealed by the company) in order to have a clear view of what is happening.
Dividends: Last, but not least, dividend payments are the *obvious* backbone of any dividend growth investing strategy. But I don’t focus on the real dollar amounts or the yield, I focus solely on dividend growth. Dividend growers are demonstrating confidence in their business model. This is a statement claiming that the company has enough money to both grow their business and reward shareholders at the same time. This also tells you that the business can pay off its financial obligations and invest in new projects (CAPEX). No management team would increase their dividend if they lack the cash to run their business.
Q: You’ve been using YCharts to power your analysis for years. Walk us through your process for identifying and researching dividend stocks?
A: I usually start by using the Stock Screener to filter for my dividend triangle metrics, and find stocks with positive values for 5 year revenue, EPS, and dividend growth. Then, I can narrow it further to the sector I want to invest in and dig deeper on individual stocks.
I’ve also created a set of saved Fundamental Charts showing various metrics of interest (payout ratios, long-term debt, cash from operations, etc.). Switching from one chart to another makes it very easy to analyze stocks.
Once I like a company, I look for a contrarian thesis on the web. I like to read analyses that disagree with me to make sure I’ve covered all the angles.
I usually finish my analysis on the company’s website to dig deeper into the company’s quarterly results, investor presentations, etc.
Q: What’s your advice for investors who may be interested in dividend stock investing? What are the initial steps to take to get started?
A: Dividend investing is like many other strategies, in that you need a strong investing process to make it successful. Don’t fall into the high yield dividend trap; consider the dividend growth potential of each company instead. Once you have made your choices, buy now, and be patient. Dividend growth investing is all about the compounding effect of holding great businesses over a long period of time.